What is a Reverse Auction For REOs in Real Estate Investing?

Asset Managers are the individuals responsible for selling bank-owned properties and are employed by the lenders who foreclosed on these properties. Their responsibility is to get the highest possible price in the shortest possible time. The sale of the REO reduces the lenders cash requirements for the Federal Reserve and reduce their carrying costs.

The Asset Managers rely heavily on local realtors to generate BPOs (Brokers Price Opinions) for a reasonable assumption of what is the fair market value of the property. If the BPO is what is called a „drive-by“, the BPO can miss the condition of the interior of the property. This interior damage can be so substantial as to reduce the property value by 50% or more. An interior BPO can always be done after the lender has the property deeded to them through the foreclosure or deed in lieu of foreclosure process.

The other major factor in pricing the REO is what was owed on the loan balance at the time of foreclosure, usually called the final judgment amount in judicial foreclosures. The lender would ideally like to get this amount but this is a function of market conditions. If the foreclosed loan is a first or senior loan and a second or junior mortgage was extinguished at the foreclosure auction, there could be equity.

If the lender sells the REO for anything above his findal judgment amount, he is entitled to keep this overage. This is not true if he sells it at the auction sale for more than is owed, the junior mortgage and sometimes the homeowner are entitled to the overage.

Let’s assume the Asset Manager is ready to sell the REO property, he has a few strategies to price it to the public such as:

1. Offer the opening price at the final judgment amount and see what happens;

2. Offer the opening price at or around the BPO a realtor did for him;

3. Offer the opening price at 80% of the BPO price which he will immediately accept in almost all situations where there aren’t multiple offers;

4. Offer the property at a ridiculously low price and generate a lot of investor offers and get them into a feeding frenzy for the property.

But what if the property doesn’t sell as expected? The Asset Manager now has the onerous responsibility of reducing the price of the property until it sells. Again, he has options as to how to do this which includes:

1. If the initial offering price was the final judgment amount, he can reduce it immediately to the BPO price, in some cases this could be a 30% decline or more;

2. If he started at the BPO price, he has a judgment call to make and usually he will reduce it 10% to 20% and stick for some time at this price;

3. If he started at 80% of the BPO price, he will generally order a second or third BPO and reduce it to 80% of the lower of the new BPOs, but if the new BPOs come in close to the same price as the original one, he will reduce the listing price by 20% or more – after getting supervisor’s authorization;

4. Wherever he starts the offering price as in the above examples, he can start a systematic „reverse auction“ strategy to lower the property’s listing price until it sells;

5. His final option is to do nothing and let the property sit in the market almost indefinitely until it sells – we have seen some listings in excess of 900 days on the market (DOM) and still no offers.

The reverse option method usually starts at or around the final judgment amount for a property in reasonable and possibly move-in condition. If there is no interest or contracts that close, the property’s listing price is reduced by from 6% to 8% on a regular basis every 2 to 3 weeks. This might look like an initial offering price of $100,000 and in three weeks the price is reduced to $93,000 and again in 3 weeks to $86,500, and again in 3 – 4 weeks to $80,500 and so on until it is sold.

This method is designed to psychologically prey on the perspective buyers looking at the property and in some cases it works. For the Asset Manager it takes away some of the responsibility of decision making and every time a price decline is made, it is automatically sent out on the MLS and investors see the Price Decline as a undervalued property.

Don’t allow yourself to get intimidated by this method of price action as the Asset Manager already knows how much less than the advertised price he will accept and it isn’t what the property is listed at. If you decide to bid on one of these reverse auction properties, bid 80% of the asking price as this is very likely the price he will accept at that time and he will go lower if it doesn’t sell.

You may hear from the listing agent that the Asset Manager will not accept any offers lower than 80% of the listing price, and it may be true, so offer 80% and if your offer is accepted, be careful as he would have gone even lower. All of these offers and counter-offers are a function of the condition of the property, where it is located, how badly you want it, and how motivated the Asset Managers are at the time. For your best results, consider only bidding on properties that have been on the market for 30+ days and/or have had 3+ price reductions.

Immobilienmakler Heidelberg

Makler Heidelberg

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